Understanding retention starts with three principles: the economy, your organization and the employees themselves.
Employee retention and turnover are inversely related. Retention measures who is staying; turnover measures who is leaving.
Turnover rates vary depending on an organization's size, industry, levels of hierarchy, geography, local economy and larger market factors. The decision to leave an organization also depends on what it's like to work there, as well as the needs, priorities and life stage of individual employees.
Why Retention Matters
Having employees who know what they are doing and do it well is every employer's goal. Employees are essential to the quality of an organization's products and services, as well as its relationships with its clients.
Losing talented employees has many negative consequences and can be expensive. Research from The Center for American Progress estimates the median cost of losing and replacing an employee is 20 percent of the employee's annual salary. The cost is less for lower skilled and lower wage positions, but it can be much higher for highly skilled and executive positions. These costs include recruiting and training the new employee, and the loss of productivity while the position is open.
There are additional intangible effects when an employee leaves, such as the loss of morale and productivity for the remaining employees who may miss their colleague while they also have to do their work. The organization loses all of the experience and institutional knowledge the person has, which can be significant when longtime employees leave. The client and colleague relationships can also be disrupted, sometimes resulting in loss of contracts.
All of this impacts the bottom line.
Understanding retention and turnover — and knowing what to do about them — is an important part of an organization's overall business strategy.
What is Turnover?
Turnover is the proportion of workers who leave their jobs. All organizations have turnover. It is expected, normal and part of every business. There are two types of turnover: voluntary and involuntary.
Involuntary turnover is people leaving because the organization terminated the employment, usually because of layoffs or performance issues. Involuntary turnover is something each organization addresses based on its needs. It's the turnover that organizations require, even if they don't always want it.
Voluntary turnover involves workers leaving because they choose to. This part of turnover is unpredictable for organizations and it's difficult for them to plan ahead for expected replacement, recruiting and training costs and lost productivity, all of which can be expensive for the business.
What is Retention?
Retention is the measure of how successful organizations are at keeping the employees they want to continue to work there. In discussing retention, it's most useful to focus on identifying the causes of voluntary turnover for an organization.
There are three primary forces that influence retention: the market, the organization and the employee.
How the Market/Economy Influences Retention
Whether the overall economy is growing or contracting, along with the economic factors affecting the local job market, have significant impacts on employee retention.
There is a strong connection between the economy, unemployment rates and voluntary turnover. Ahu Yildirmaz, vice president and co-head of the ADP Research Institute, explains, "When the economy is growing, job growth increases and unemployment rates decline. Workers have more opportunities to change jobs and feel more comfortable going to new organizations. In a growing economy, employers are often hard-pressed to find qualified workers to fill openings and to keep the employees they have."
Yildirmaz continues, "Conversely, when the economy slows and unemployment rates rise, then employees tend to stay in their jobs longer. Employees are more hesitant to make a change because there are fewer opportunities. Employers are often leaving open positions unfilled or conducting layoffs."
Other market factors can also affect retention. If a competitor opens a plant or office near an existing organization, there may be more qualified employees in that region compared to other places. But both organizations could face a shortage of skilled workers because there aren't enough people to staff both places. In this example, retention becomes even more important because it will likely be less expensive for the competitor to recruit talent away from the existing business than to move new workers into the area or train people.
How the Organization Influences Retention
What it's like to work for the organization is a significant factor in whether, and how long, employees stay. There are many factors that can affect the relationships between the organization and the employees, including culture, compensation and benefits, work relationships with managers and colleagues and, of course, the work itself. Opportunities for growth and development also make a difference in how employees see their career over time.
ADP Research Institute's Evolution of Work 2.0 report explains, "A majority of employees take pride in their work and have greater loyalty to their companies than employers estimate. But globalization of business, domestic and world politics, corporate profits and automation erode the confidence that employees feel in their companies and the work they perform. While the continued rise of multinational corporations and a global workforce have led to more efficient and streamlined business practices, they have also created a one size fits all script to HR policies that risks being too impersonal to attract and retain the best talent."
How the Employee Influences Retention
Retention is also influenced by what is going on in individual employees' lives.
Life stage is a large factor. Younger employees tend to change jobs more often because they are starting out in their careers and relationships, and are generally more mobile. Workers under 25 have the highest overall turnover rates of 4.1 percent per month, and 26- to 35-year-olds have a monthly turnover rate of 2.8 percent.
As people settle down in personal relationships, buy houses, have kids in school and find careers they enjoy, they stay with an organization longer. Turnover rates for employees ages 36-45 are 2 percent, ages 46-55 are 1.6 percent and ages over 55 are 1.3 percent per month.
With all of the various influences on retention, it's important to understand how they affect your organization and what you can do to improve and manage employee retention. We will be exploring this in our next post, "How to Know if You Have a Retention Problem."
Download the report: Getting Your Retention Strategy Right
Read our Getting Talent Retention Right series: